While unemployment stalled at 9% since the start of the year, temporary work increased by a remarkable 9.9%, Bureau of Labor Statistics shows. If history is a guide, this means a recovery in the permanent job market could be well on its way, although questions about its timing remain unanswered.
-by Peter Vanham
Since the Bureau of Labor Statistics (BLS) published its latest report on US employment, an increasing number of analysts seem convinced that the US job market is unlikely to recover in the coming months. The report, published last week, stated there was no net job creation in the US during August. That troubles analysts following the job market. “That the economy added no net new jobs in August, [suggests] that the weak economic momentum of the first half of the year is carrying into the third quarter” summarized TD Securities economist Milan Mulraine the analyst feelings. “Moreover, there is plenty of other evidence pointing to ongoing labor market struggles” pointed Mr Joshua Shapiro from MFR Inc. out[1].
Yesterday’s FED Beige Book report added to the pessimistic picture, stipulating that even sectors like manufacturing, once “pillars of the recovery”[2] were being infected. Publications like the Wall Street Journal subsequently argued that “the recovery was faltering”, amongst other reasons, because “employers held off on filling open positions, or […] hired temporary workers rather than full-time staffers”[3]. The implicit reasoning behind that pessimistic recovery outlook is that companies hiring temporary workers are not advancing the employment rate in the long run; they are merely masking it in the short run.
But is the outlook in the job market really that bad? And is the hiring of temporary workers instead of full time employees indeed a sign of more bad news to come? The historic data from the BLS contradict that pessimistic view. More often than not, a surge in the temporary job market goes hand in hand with a raise in general employment (see graph 1). “Mechanically, that is what happens” explains Professor Bentley MacLeod, a labor economist from Columbia University, “because every new job, whether temporary or not, adds to the overall employment.”
Temporary job growth is a bellwether for permanent job growth
Yet, the correlation between temporary jobs and overall employment turns out to be somehow more sophisticated. Over the last decade, the peaks in unemployment of 2003 and 2009 occurred several months later than the lows in temporary employment. In other words, the temporary employment sector is pre-cyclical, functioning as an early warning for important changes in the overall employment.
“Our industry is a bellwether for the labor market” confirms Mark Jelfs from Manpower, the world’s largest temporary work firm. “When the recession kicks in, the temporary work is the first to feel it. But the flipside is that the temporary work goes up first when economic recovery is on its way. The permanent employment usually follows a few months later”.
With that knowledge, could the current BLS report hold a brighter prediction for the future? As can be seen (graph 2), the temporary job market has been rising steadily over the year. From 2.06 million contracted workers in January the sector increased to 2.27 million workers in August, achieving a year-to-date growth of 9.9% in 2011. If the temporary job market is indeed a ‘bellwether’, as it has been in the past, the increase there is the prelude to an imminent drop in the unemployment rate.
Temporary work has risen by 10% in 2011
But why then, aren’t we seeing this recovery yet? Both in 2003 and 2009, unemployment started falling few months after the temporary job market started picking up. This time, the temporary job market has been rising for almost three quarters, with no sign of recovery in the overall unemployment in sight.
“Employers are still on the knife edge now,” explains Mr. Jelfs, “they are still very cautious. Until they see stable demand for products and services, they will not hire people yet. There will certainly be growth in the future, but we cannot predict when.”
“The truth is”, says Professor MacLeod, “that we don’t know. Predicting the economic future is like astrology. You’re looking at patterns and trying to derive the future from it, because it is very appealing. But we’re bound to be wrong.” In other words, the temporary job market might be an indicator for future trends in the job market, that doesn’t mean it’s an accurate ridge for it. Like in astrology, the signs might predict the future, but they might as well not.
Peter Vanham Reporting 